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Did Qualcomm Lowball 2014 Guidance?

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In Qualcomm's (NASDAQ: QCOM  ) most recent earnings release, the company guided to $26 billion-$27.5 billion in sales, below sell-side consensus of $27.55 billion. At first, this really freaked out shareholders, and the stock lost as much as 4.5% in the after-hours trading session. However, shortly after the report, the stock powered on to new 52-week and multi-year highs. Are investors irrationally exuberant, or is there a legitimate expectation that made the company lowball guidance?

Qualcomm has done the beat-and-raise thing before
In the final report of 2012, Qualcomm guided for $23 billion-$24 billion in sales for fiscal 2013. When the year was all said and done, the company came in at $24.9 billion in sales, a full 6% ahead of the midpoint of the initial guidance. What could be happening here is that investors may simply expect that Qualcomm has lowballed guidance in the name of conservatism -- and perhaps to allow for a more competitive environment in LTE basebands than it has seen in prior years.

Indeed, a quick look at the analyst estimates for Qualcomm's fiscal 2014 reflects this sentiment that Qualcomm may be lowballing. The lowest estimate sits at $26.5 billion – the midpoint of the guided range. The very highest estimate, which sits at $27.8 billion, is a full 6.3% higher than the midpoint of the range and even a smidge higher than the high end of the range. It's clear that the investment community is expecting meaningfully better performance than guidance suggests.

Why this may not be a good thing
While the faith from the analyst community is encouraging, this serves almost as a double-edged sword. The best example of how this strategy can go wrong is the infamous fall of Apple (NASDAQ: AAPL  ) from $705. Apple, over the years, had built a reputation of seriously lowballing its guidance. Every time it reported, it was a massive "beat." After a while, the sell-side caught onto Apple's game, and trying to guess Apple's true revenue and profit numbers became more art than science. One day, however, Apple actually posted results within its guided range, much to the shock of the entire investment community.

Qualcomm has erred on the side of conservatism, and frankly, in the early stages of a high-growth market it's difficult to forecast demand. However, the smartphone market, to which Qualcomm is very highly levered to, is showing signs of maturity. This means that the "beats and raises" may not be so commonplace in this space, and that the investment community may have to reset expectations.

The big unknown
The biggest unknown at this point is just how aggressively Qualcomm's LTE competitors, including Intel (NASDAQ: INTC  ) and Broadcom (UNKNOWN: BRCM.DL  ) , will be in assaulting Qualcomm's multi-year monopoly on LTE chipsets. Qualcomm's products are excellent and span the entire gamut of price points and tiers. The competition will have less complete lineups of products to offer initially, but that doesn't automatically mean that Qualcomm can't and won't lose share.

Add to this the significant pressure in the low end from low-margin players like MediaTek and Marvell, particularly in the extremely large China market, and trying to forecast 2014 is probably more difficult than it was in the past. When you're in the entirety of the high end and are growing share in the low end, it's pretty easy to post excellent results. But when you're dealing with brand new competition on all fronts, it gets much tougher. It is likely, however, that Qualcomm did already bake some conservatism into the guidance.

Foolish bottom line
Next year should be a good year for Qualcomm, although with Broadcom having publicly announced a smartphone design win from Samsung and with Intel claiming that customers will see "one or two" top vendors shipping Intel-based phones next year, Qualcomm is probably right to issue conservative guidance. However, such a guide does no good when the market thinks that it's conservative and likely to be beaten. It still very well may be, but there is that threat of disappointment that makes Qualcomm less attractive at $72 than it was in the mid $60s. 

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